Low rates spur homeowners to hurry up and refi

They're knocking on the lender's door. As mortgage rates have tumbled to the lowest level in more than four decades, demand for refinancing has fired up homeowners nationwide.

Last Thursday, the average rate on a 30-year mortgage dipped to 3.37 percent from 3.39 last week, mortgage buyer Freddie Mac said. Two weeks ago, the rate reached 3.36 percent, its lowest level on records dating to 1971. Here's advice for people thinking about getting in on the action.

Why refinance?

Generally, the primary reasons are to:

• Lower monthly payments.

• Eliminate the unpredictability of an adjustable-rate mortgage by switching to a fixed rate.

• Free up home-equity cash for home improvements, college costs or other expenses.

• Shorten the loan term, say from a 30- to a 15-year mortgage, which can save thousands in interest payments.

Should you refi?

It's a personal calculation that varies. Generally, homeowners should look at how long they plan to be in their current home and whether the upfront costs outweigh the monthly savings.

"If you're not going to be in your home another one or two years, you're not going to recoup the closing costs," said Greg McBride, senior financial analyst with Bankrate.com.

"Everybody's situation is different," said mortgage consultant O.J. Vallejo. "There's no right or wrong answer. The only answer is what works for your family."

Some couples who refinance are looking ahead to retirement.

"Paying off the mortgage is now back in vogue," said Vallejo, especially for people in their late 40s or 50s who want to be mortgage-free at retirement age.

That doesn't necessarily mean they'll lower their monthly payment by refinancing. For example, a couple with a $250,000, 30-year loan at 5.25 percent three years ago would have been paying about $1,380 a month. If they refinanced their current balance to a 20-year, 3.5 percent loan today, their payments would increase slightly, to $1,405.

"Their payment goes up $25, but they just took seven years off their mortgage," said Vallejo. "That's almost $116,000 in interest. That's huge."

On the other hand, younger home­owners with kids might choose a 30-year mortgage when they refinance because they need the lower monthly cash flow to save for college or pay off debt. Or people with adjustable mortgages due to reset to higher rates may want to lock in single-digit rates.

What you'll pay?

The mortgage rate you'll be offered depends on numerous factors, including your credit score, loan amount, loan-to-value ratio (how much you owe compared to the home's appraised value), length of your loan term and type of home (rates on condos, rentals and vacation homes are typically higher.)

Lots of mortgage ads promise "no-cost" loans. According to some lenders, that's a misnomer.